Good day, ladies and gentlemen, and welcome to the third quarter 2022 Hess Midstream conference call. My name is Shannon, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Jennifer Gordon, Vice President of Investor Relations. Please proceed.
Thank you, Shannon. Good afternoon, everyone, and thank you for participating in our third quarter earnings conference call. Our earnings release was issued this morning and appears on our website, www.hessmidstream.com. Today's conference call contains projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements. These risks include those set forth in the risk factors section of Hess Midstream's filings with the SEC. Also, on today's conference call, we may discuss certain non-GAAP financial measures. A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the earnings release and our transcript of today's prepared remarks.
With me today are John Gatling, President and Chief Operating Officer, and Jonathan Stein, Chief Financial Officer. In case there are audio issues, we will be posting transcripts of each speaker's prepared remarks on www.hessmidstream.com following their presentation. I'll now turn the call over to John Gatling.
Thanks, Jennifer. Good afternoon, everyone, and welcome to Hess Midstream's third quarter 2022 conference call. Today, I'll review the progress we're making on executing our strategy, discuss our operating performance and capital program, and review Hess Corporation's results and outlook for the Bakken. Jonathan will then review our financial results and guidance. Beginning with Hess Upstream's results. Today, Hess reported third quarter Bakken net production of 166,000 barrels of oil equivalent per day, which was above their guidance range of 155,000-160,000 barrels of oil equivalent per day, reflecting strong execution and recovery following challenging weather conditions in the first half of the year.
Hess anticipates fourth quarter Bakken net production to be in the range of 165,000-170,000 barrels of oil equivalent per day and full year 2022 Bakken net production to average approximately 155,000 barrels of oil equivalent per day, which is at the high end of Hess's previous guidance range of 150,000-155,000 barrels of oil equivalent per day. Hess's fourth Bakken drilling rig commenced operations in July, supporting Hess's planned production ramp to approximately 200,000 barrels of oil equivalent per day in 2024, which drives long-term volume growth for Hess Midstream.
Looking ahead, we expect all our systems to be above MVC levels in 2023 and 2024, primarily driven by Hess's planned production growth and its goal of achieving zero routine flaring by the end of 2025. Turning to Hess Midstream results. Our third quarter throughput volumes recovered strongly, growing approximately 20% on average from the second quarter. Third-quarter volumes averaged 110,000 barrels of oil per day for crude terminaling and 83,000 barrels of water per day for water gathering. Reflecting strong gas capture, third-quarter gas processing volumes exceeded MVC levels, averaging 354 million cubic feet per day, contributing to third-quarter Adjusted EBITDA of $254 million, which was above the top end of our guidance range.
We anticipate fourth quarter gas, oil, and water volumes to be relatively flat compared to third quarter, driven by planned maintenance activities deferred from the third quarter. Now moving to Hess Midstream guidance, which was included in our earnings release and is available on our website. We've updated our volume guidance to reflect third-quarter performance and now expect full year 2022 gas processing volumes to average approximately 330 million cubic feet per day, crude terminaling volumes to average approximately 105,000 barrels of oil per day, and water gathering volumes to average approximately 75,000 barrels of water per day. We continue to make excellent progress on our 2022 capital program, with activities primarily focused on flare reduction through the continued expansion of our gas gathering infrastructure. In September, we brought online the second of two new compressor stations planned this year.
In aggregate, the two stations provide an additional 85 million cubic foot per day of capacity and can be expanded up to 130 million cubic foot per day in the future. Additionally, the stations were safely completed several months ahead of schedule and below budget, demonstrating the benefits of our lean approach to standardized compression design. We're proud of our team for outstanding execution amid a challenging inflationary cost environment. As previously announced, we expect to initiate construction on a third compressor station in the fourth quarter, which would provide an additional 65 million cubic foot per day of capacity in 2023 to further support Hess and third-party production growth.
We expect full year 2022 capital expenditures to total approximately $235 million, comprised of $120 million in compression expansion, approximately $105 million in gathering system well connects, and $10 million of maintenance activity. In closing, we continue to execute our strategy focused on safe and efficient operations. Preserving cost discipline through our lean driven standard design and build philosophy, allowing us to efficiently grow throughputs, sustainably generate cash flow and return capital to our shareholders. I'll now turn the call over to Jonathan to review our financial results.
Thanks, John, and good afternoon, everyone. As John described, we are making good progress in executing our strategy, and we are excited to support Hess's development in the Bakken while continuing to deliver on our strategy of consistent and ongoing return of capital to our shareholders. Beginning with our results. For the third quarter, net income was $159 million compared to $152 million for the second quarter. Adjusted EBITDA for the third quarter was $254 million compared to $243 million for the second quarter.
The change in adjusted EBITDA relative to the second quarter was primarily attributable to the following. Total revenues, excluding pass-through revenues, increased by approximately $19 million, primarily driven by a combination of higher MVCs and throughput volumes that exceeded our MVCs in gas processing and one of our gas gathering subsystems, resulting in segment revenue changes as follows. An increase in processing revenue of approximately $5 million and an increase in gathering revenue of approximately $14 million. Total costs and expenses, excluding depreciation and amortization, pass-through costs, and net of our proportional share of LM4 earnings increased by $8 million as follows. Remediation expenses for a produced water release of approximately $6 million, inclusive of both actual costs incurred to date and estimated total future expenses.
Higher operating and maintenance activity of approximately $2 million in our gathering segment that was seasonally higher compared to the second quarter, but lower than anticipated as a result of the deferral of some maintenance activities until the fourth quarter, resulting in Adjusted EBITDA for the third quarter of $254 million above the top end of our guidance range. Our gross Adjusted EBITDA margin for the third quarter was maintained at approximately 80%, highlighting our continued strong operating leverage. Third quarter maintenance capital expenditures were approximately $1 million, and net interest, excluding amortization of deferred finance costs, were approximately $38 million. The result was that Distributable Cash Flow was approximately $215 million for the third quarter, coverage our distribution by 1.6 times.
Expansion capital expenditures in the third quarter were approximately $59 million, resulting Free Cash Flow of approximately $156 million. At quarter end, debt was approximately $2.9 billion, including a drawn balance of $43 million on our revolving credit facility, representing leverage of approximately 3x Adjusted EBITDA on a trailing twelve-month basis. We expect to decline below this target in 2023, with increasing Adjusted EBITDA, providing flexibility for incremental return of capital to the shareholders. Consistent with our return of capital framework, earlier this week, we announced our third quarter distribution that increased 5% on an annualized basis and represents a 10% increase compared to the third quarter of 2021, including our distribution level increase earlier this year. Turning to guidance.
We anticipate fourth quarter net income and Adjusted EBITDA to be approximately flat compared to our higher third quarter results, reflecting the combination of the following. Stable revenues for the majority of our systems with throughputs below MVC levels. Downtime from planned maintenance activity that was deferred from the third quarter, driving expected lower throughput volumes and revenues at our gas gathering system operating above MVCs and lower total OpEx in the fourth quarter with the produced water remediation expenses in the third quarter. Reflecting these fourth quarter expectations and our strong third quarter results, we have updated and raised our full-year financial guidance relative to the midpoint of our prior guidance. We now expect net income to be approximately $630 million and Adjusted EBITDA of approximately $990 million, representing 9% growth compared to full-year 2021 results.
Maintenance, capital and cash interest are projected to total approximately $150 million for the full year 2022, and Distributable Cash Flow is expected to be approximately $840 million, resulting in an expected distribution coverage of greater than 1.5x . We expect to end the year with leverage at our conservative 3x Adjusted EBITDA leverage target. Looking forward, in January, we will release our 2023 operational and financial guidance, including 2025 MVCs. We expect to continue to execute our financial strategy over coming years as we have clear visibility to expected revenue and Adjusted EBITDA growth, supported by organic growth above MVCs in 2023 and 2024.
Emphasizing this visibility to continued growth in Adjusted EBITDA, our current MVCs for 2023 and 2024 reflect continued organic growth in gas processing and gathering throughputs, driving increasing gas revenues that, excluding pass-through revenues, comprise approximately 75% of total affiliate revenues. As a result, we anticipate continued growing Adjusted EBITDA and stable CapEx and expect growing Adjusted Free Cash Flow sufficient to support our growing distributions and incremental financial flexibility, allowing for continued return of capital to shareholders consistent with our financial strategy. In closing, we are very pleased with the progress we are making in our business and look forward to a visible trajectory of growth in our operational and financial metrics that underpins our unique and differentiated financial strategy with a focus on consistent and ongoing return of capital. This concludes my remarks. We'll be happy to answer any questions.
I will now turn the call over to the operator.
Ladies and gentlemen, if you have a question, please press star followed by one on your phone. Questions will be taken in the order received. Please press star one one to begin. Your first question comes from the line of Michael Lapides with Goldman Sachs. Your line is now open.
Hi. Thanks everyone. Thanks John and Jonathan for taking my questions. I actually have a few. One kind of more near term, one a lot longer term. On the near term, Jonathan, you used the word stable when referring to CapEx going forward. Does that imply that future CapEx or, you know, growth CapEx or expansion CapEx looks a lot like 2022 levels? Or should we be thinking, given the amount of new compression you added in 2022, that future CapEx may even be a little bit lower than this year's?
All right. I'll just start and give kind of the overview, maybe just a general talk on, you know, where we think direction's going on guidance. Then I'll turn it over to John Gatling to give a little bit more detail. Look, in terms of CapEx specifically, we've really said that we expect CapEx for 2023 to be stable, as I said, at or below levels of this year. John Gatling can break that down, but it will continue to be, you know, well connects and compression. With that stable capital, and as I talked about in my remarks, we expect growing EBITDA that you can see visibly through our current MVCs. Of course, we'll update those MVCs, including our 2025 MVC that we expect to show and demonstrate the visibility of our continued growth.
Remember, with that stable capital that we'll have next year and then growing EBITDA, that means we'll also have significant financial flexibility in terms of leverage. As I mentioned, we're at our 3x target already. As we move into next year with growing EBITDA, we expect that to decline. I also mentioned our revolver is just at $43 million now. As we move into next year, we'll be generating excess Free Cash Flow above our growing distributions, giving us incremental financial flexibility for our return on capital program as well. That's kind of the broad contours. We'll give more information in January, including our 2025 MVC, as I said. That's generally kind of the broad direction of where we think things are headed.
Let me just turn it over to John if he wants to give any more on the CapEx.
Sure. Thanks, Jonathan. We've been working towards Hess's production growth to 200,000 barrels of oil equivalent per day in 2024. We've been kind of targeting that from a CapEx perspective in compression and gathering. We've been continuing to focus on compression. I would say that the spend, as Jonathan mentioned, in 2023 is gonna be at or below the 2022 level. From the growth perspective, you can see it in the implied volumes from our 2023 and 2024 MVCs, that we are expecting growth and we are gonna continue to focus on well connects and compression.
Again, you know, we have 500 million a day of total processing capacity, and we'll continue to grow towards that capacity as Hess grows its production in the basin.
Got it. One kind of longer-term question, kind of several years out. If Hess really achieves its zero flaring goal, outside of the kind of production growth volume, how should we think about what that incremental like getting from current flaring to zero flaring means for you?
Yeah, I mean, we definitely see the zero routine flaring commitment from Hess as a positive. It's definitely a catalyst for the midstream. Hess is doing actually very well. I mean, they're well above 95% gas capture currently. They made the commitment to zero routine flaring by the end of 2025. We're on track to support Hess's growth towards zero routine flaring by the end of 2025. I think, you know, as Hess has demonstrated in its sustainability report, it's committed to continuing to improve emissions reduction activities in the basin. You know, I think we're well-positioned to help support and grow that. From a planning perspective in MVCs, and as I mentioned, the implied 2023, 2024 volumes, and we'll give 2025 MVC guidance in January.
The gas capture component of that and the zero routine flaring commitment is built into those forecasts. We feel good about it. Again, it's underpinning our growth, and we're here to support Hess's objectives from a climate and emissions reduction perspective.
Got it. One last one, this may be one for Jonathan. How should we think about the move in interest rates? A, what that means for financing costs for you, including doing things like using the revolver. B, kind of think in a more two to three years using incremental debt issuance as a mechanism or a tool in kind of the broader return of capital to shareholders process.
Sure. You know, great question. Let's just start, you know, in terms of currently where we sit right now, you know, really only our bank facilities, which we just, recently renewed through 2027 are exposed to floating interest rates. The rest of our debt is fixed. That leaves us with just, you know, 15% of our debt is floating. As I mentioned on our revolver, our $1 billion-dollar revolver, we only have $43 million drawn. With the extension of the bank facilities, we really have no debt maturities until 2026 at this point. We have, with that means significant flexibility, to execute, you know, our repurchase program from a leverage point of view, as we talked about as we go into next year in terms of delevering.
Also, we're also going to be generating now excess Free Cash Flow beyond our growing distributions, really without, you know, any ongoing balance on the revolver to pay down except just working capital. That creates additional cash flow to fund our return on capital program. You know, on an overall basis, our weighted average cost of debt, you know, just looking at the fixed, you know, above 5%, you know, very, very good there. We're really in a great spot. We don't have any pressures in terms of short-term maturities or any pressures there. We have a lot of flexibility in terms of using a revolver to be able to optimize as necessary. We have cash flow that will support the leverage as well for our repurchases. We're really in a good spot.
We don't see anything that is going to, you know, in terms of the interest rate environment, we don't see it as an obstacle in terms of us being able to continue to execute our return on capital program.
Got it. Thanks, guys. Sorry to hog up the beginning of the call. Much appreciated.
Thanks, Michael.
Thank you. Your next question comes from the line of Steven Gee with JPMorgan. Your line is now open.
Hey, good afternoon. I guess just starting out, with the volume increase there, does this kinda flow through into 2023 for you guys? With that, do you see all systems above MVCs next year with this? Is that for all four quarters or is that more of an average?
Yeah, why don't I. I'll hit the volume question and then I can hand the MVC question over to Jonathan. On the volumes, you know, from Hess's perspective and the volume growing to 200,000 barrels of oil equivalent per day by 2024, you know, we've built that into our forecast. Again, we'll update guidance going into January as far as the 2025 MVCs. That'll give you an indication of where volumes are heading. From our perspective and looking at the implied 2023 and 2024 volumes from the MVC based on the implied nomination from Hess, we definitely see growth going into 2023 and 2024.
From an MVC perspective, we're definitely gonna be in good shape, but I'll hand it over to Jonathan for a little bit more detail.
Yeah. I think in terms of MVCs, just, you know, as a reminder, our MVCs are set three years in advance. 2022 is really called the last MVC from prior to the downturn, when Hess reduced the number of rigs. As we move into 2023 and 2024, we're really going to be, these are MVCs which are set based on, I'll call it the more current plan. As a result, you know, we expect to be above MVCs, which were set at 80% of the current plan in 2023 and 2024.
What I think is, gives us confidence in that growth is, as John said, with Hess continuing to be, you know, moving towards the 200,000 net production goal, 200,000 BOE per day, as well as he talked about the, zero routine flaring goal. All that, as John said, really underpins our, you know, our growth that we see there. We'll give a new MVC for 2025 that will, essentially, you know, we expect to show continued growth as well. In terms of how we think, you know, volumes, the way to think about this is to say, look, we're at MVC levels for the majority of our systems this year. As I just said, we're gonna be above MVC. Those MVCs were set at 80% of expected throughput.
Think of the growth from this year to next year as being from MVC levels this year to physical growth into physical volume levels next year. 2023 and 2024 will continue to be on a sustained basis now above MVCs. Therefore what we'll really be is going from physical volumes in 2023 again to physical volume growth again in 2024 and then so on from 2025. This year is really, as we go into next year, really this year's MVC levels to next year's physical levels. That's the way to think about our growth as we go into next year.
Got it. Thank you for that. Once Hess hits their 200 barrel of oil equivalent per day, how do you gauge third-party interest? You know, how do you determine that on your system and what is the interest level there from Hess's perspective?
Yeah, I mean, obviously, Hess is gonna be our primary customer, and that's where we're gonna focus most of our efforts. As we've always done and have been successful at doing, you know, we continue to be focused on capturing any third-party volumes we can in the area to fill any idleness that we have in our system. Any available capacity, we're looking to fill it by third parties. You know, again, this is a very good problem to have, which Hess is sitting on top of Great Rock. We're on top of that acreage position. There's other third parties that kinda surround that as well. We're a natural aggregator for those volumes, and we're continuing to look at that.
From our perspective, you know, we've assumed approximately 10% oil and gas third parties. We're continuing to kinda forecast that. Again, we look for opportunities to capture more volumes as it becomes available. We think our system is strategically positioned to attract additional volumes as we have capacity available in our system.
Understood. One more, if I could. Just wanted to see what you're seeing in the basin right now as far as ethane recovery rejection, and then how you kinda see that progressing, I guess, going forward.
Sure. I mean, I think ethane is a bit split. You've got some processors that are actually recovering ethane and taking it to market. Some are rejecting the ethane and including it in the residue stream coming out of the basin. I think it's really gonna depend on market and kinda what the value of ethane is. It's also gonna depend on export capacities for both ethane residue and NGLs ultimately. I think, you know, from our perspective, from Hess's perspective, we're extremely fortunate that we've got full fractionation capability up to 250 million cubic feet per day at the Tioga Gas Plant, plus another 150 million a day of Y-grade capacity at the gas plant.
We've got reliable takeaway for all three streams, residue, ethane and NGLs, both fully fractionated NGLs, but also Y-grade. I think from our perspective, we've got the export solved. We're gonna continue to work on how do you optimize between ethane recovery and other NGLs and even reject into the residue stream. At the end of the day, it becomes an economic and commercial, and ultimately an export capacity question.
Got it. Appreciate it. Thanks, guys.
Yeah. Thank you.
Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.